We are often approached by clients who have received advice that they should consider gifting their house to their children as a means of avoiding this being sold to meet ongoing care costs in the future, or to minimise their Inheritance Tax liability on their death. However, the reality of a gift of the family home is not straightforward and there are many points to be considered.
You will no longer own the property
It is an obvious point to make, but one of the key consequences of a gift of your home would be that this would cease to be your own property. It will be owned by whoever you have chosen to gift this to, and they can choose to use the property however they wish.
Whilst it is often difficult to imagine the worst-case scenario when your family is on good terms and a gift is made through the generosity of a parent, there are any number of things which could go wrong:
- The recipient of the gift may enter divorce proceedings and the property may need to be divided as part of the matrimonial assets;
- The recipient of the gift may become bankrupt, and the house could be used to settle their debts;
- The recipient of the gift may die unexpectedly, and the property would pass under the terms of their Will to another beneficiary or under the laws of intestacy;
- The recipient of the gift may simply decide to sell the property for other personal reasons; and would be within their rights to do so.
All of the above options would jeopardise your ability to reside in the property following the gift.
The key point to remember is that with the transfer of the property to your children, you lose a real measure of control and security.
The impact of gifting your home on your Inheritance Tax position
Often people think that if you change the title deeds to your home to put it into the name of your children or another recipient, then this will remove the value of your home out of your estate for Inheritance Tax. Unfortunately this is not the case, if you continue to live in the property. If you did continue to stay in the house, then this would be classed as a 'Gift with Reservation of Benefit'. This would mean that the value of the house when you die would be aggregated with the remainder of your estate and Inheritance Tax would be payable on the total sum. This would apply regardless of how long it had been since you had gifted the property, as long as you remained resident in it after the gift.
The only way in which this might be remedied, and to make this an effective gift for Inheritance Tax purposes, would be to pay a full market rent to continue to live at the property. The rent would have to be independently reviewed every three years and it would not be sufficient for this to simply be a token rent, or estimated value. This is an onerous undertaking and one which HMRC often conduct further reviews into when reported to them following a death.
In contrast, if you give away your house and then move out, perhaps to downsize, then this gift will form a 'Potentially Exempt Transfer' (PET). If you make a PET and do not survive for seven years after the gift, then the gift will be counted within your estate for Inheritance Tax purposes. This is of course, only relevant if you do actually move out of the property fully following the gift, which is perhaps a more unusual scenario.
The impact of gifting your home on care home costs
Clients often voice their concerns about the value of their property being taken into consideration to meet costs of care in the future with the local authority and consider gifting the property as a means to remove the asset from the local authority's reach.
However, local authorities do have the ability to challenge such gifts if they deem these to be a "deliberate deprivation of capital". If you did require care in the future, the local authority will look at your financial position to make this assessment and as part of that exercise would consider if you had deliberately deprived yourself of capital, such as making a gift of your home, to avoid potential care costs. Importantly, there is no limit on the time which the local authority can instruct a review over.
If the local authority were to make a finding that you had deliberately deprived yourself of assets, the effect of that would be that you would be treated as owning the property you had gifted away, and care home fees would be assessed accordingly. Ultimately, it could mean that the property would need to be sold to fund those care costs, in a worst-case scenario.
Whilst the proposition of gifting your property to your children either as a protection against care home costs, or to reduce an Inheritance Tax liability, can appear attractive on paper, the reality is decidedly more complex and requires full and considered advice before any decision is taken.
We would always recommend clients who are considering a gift of their property to contact us to discuss matters in full, where we may well be able to provide an alternative and more tax efficient solution to overcome the issues at hand.
If you would like to discuss your tax and succession planning objectives, then please do get in touch with our team.
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